How should I invest if we’re going into a recession?

I keep hearing there’s going to be a big recession. I timed the sale of my ETFs really well after COVID, and now I’m thinking maybe I should put all my money into bonds or term deposits until we ride out the economic turmoil. I’ve been sitting on a lot of cash, and it just seems like the dip in the market isn’t coming. I’m in my early thirties, and earn pretty well. What are your thoughts on the best investment strategy given current market conditions?

I’m not in the business of making economic predictions. What I can do is help you understand foundational investing concepts to make clearer decisions in times of uncertainty.

Riding the waves of the market will often leave you better off than trying to pick the peak,Credit: Simon Letch

Firstly, the investment strategy you choose is less about what’s happening in the market this year, and more about your personal preferences, investing skills, and your financial goals.

For instance, do you want a more set-and-forget strategy? Or do you like being actively involved? How much time do you want to spend dedicated to selecting and managing your investments? Is it more important to you to maximise returns, or keep things simple?

Someone who wants a passive approach may design their plan such that they can just keep investing according to the plan through the ups and downs. Someone who wants to be more actively involved, may spend more time making changes according to market movements. Both can yield good outcomes but there are pros and cons to each.

It also depends on your financial goals. Since you’re still pretty young, you’re likely in the accumulation stage of wealth where your priority would be growth (as opposed to preservation).

While you’ve been sitting on your cash waiting for a crash, your money could have been in the market growing.

Usually, this means holding a significant allocation towards growth assets (like shares and property), even through market downturns. Often, the biggest growth comes immediately after the downturns, which can’t be predicted or timed. So if you pull everything out of the market hoping you’ll get back in when the market hits the bottom, you’re likely to miss it.

In contrast, someone who is approaching retirement may prioritise preservation, which means they’d put a larger allocation towards more defensive assets (like term deposits, bonds, gold etc). They can’t afford a high allocation to growth assets because no one knows how long a recession will last, during which time they would need access to their retirement funds.

However, they would still have some allocation towards growth assets because even at say, the age of 60, you might still have another 30 or so years to go without actively earning an income. Your investment portfolio would still need some growth to see you through that period of time.

The second thing to be mindful of is that people often lose money in investing, by trying to be too smart. Here’s what I mean:

Time in the market, not timing the market. While everyone says to “buy low, sell high”, studies found that people who try to time the market (i.e. wait until the market hits bottom to invest, or sell when they think the market has peaked) are often worse off than those who just ride out the market movements.

This makes sense because the truth is, no one can precisely predict bottoms or peaks. So, people end up losing a lot of time simply by waiting and then being wrong anyway.

While you’ve been sitting on your cash waiting for a crash, your money could have been in the market growing. Now that you’ve waited for so long, you might be thinking “well that must mean the crash is right around the corner now” and so you continue waiting, missing out on months or even years of growth.

Complexity often yields suboptimal results. People think you need to be smart to build wealth but actually the key to building wealth is simplicity. Simplicity is sustainable (easier to maintain), scalable (you can get more results without more work) and speedy (you aren’t slowed down by overcomplexity).

Some people have a need to overcomplicate investing because it makes them feel smarter. They think it’s going to get them better results, but often all it does is slow them down. They spend more time overthinking decisions, make more changes in their investment decisions and direction, and spend more time researching than executing.

If you had a clear long-term investment plan, you’d be able to tune out the noise, stick to the plan, and just keep investing. You’d cut down the amount of time you’re spending over analysing decisions, and you would also likely get better returns long-term.

So, how should you invest given current market conditions? In accordance with a clear investment plan for the long term that already factors in cyclical market movements.

Boring, I know. But that’s actually how good investing should be.

Paridhi Jain is the founder of SkilledSmart, which helps adults learn to manage, save and invest their money through financial education courses and classes.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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